Kinross Gold Corporation

KGC Details 

A look at KGC’s 2QFY20 Financial Highlights: Kinross Gold Corporation (NYSE: KGC) is primarily engaged in the exploration and operation of gold mines. The company is amongst the top 10 gold mining companies in the world and holds major assets in the United States, Canada, and Russia. During the June quarter, the company reported a profit of $195.7 million or 15 cents per share as compared to $71.5 million or 6 cents per share reported in the year-ago quarter. The year over year increase was on the back of higher operating earnings and a reversal of non-cash impairment of $48.3 million at Lobo-Marte. During the quarter, the company reported revenues of $1,007.2 million, up 20.2% year over year, aided by higher average realized gold prices.

June Quarter Results (Source: Company Reports)

Operational Highlights: During the quarter, the company reported attributable gold production of 571,978 ounces, which declined 11.8% year over year, primarily due to lower production at Round Mountain, Paracatu and Chirano. In 2QFY20, the production cost of sales per gold equivalent ounce stood at $725 in the quarter, an increase of 9.3% year over year. All-in sustaining cost per gold equivalent ounce sold came in at $984, up 6.4% year over year. 

Balance Sheet and Cash Flow Details: Adjusted operating cash flow for the quarter came in at $416.9 million, up 45% year over year. The company exited the quarter with cash and cash equivalent of $1,527.1 million, up 221.2% from the prior corresponding period. At the end of the quarter, long-term debt amounted to $2,671.6 million, an increase of 41.3% from pcp.

Risks: On the flip side, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, KGC’s revenue, profitability and future growth rate are substantially dependent on prevailing metal prices, primarily for gold. Hence, any substantial decline in commodity prices might adversely impact the company’s financial position. Also, the company is exposed to risks relating to foreign operations that are required to be addressed from time to time. The company also faces stiff competition from peers which adds to the woes.

Outlook: In April 2020, the company suspended its FY20 outlook due to the global uncertainties led by the coronavirus pandemic. The company considers that the decision is sensible, given the substantial impact of the pandemic on the worldwide economy, global health, commercial activities, and additional possible business disruptions. However, KGC remains on track to meet its previous guidance of production, cost of sales per ounce, all-in sustaining cost per ounce and capital expenditure for FY20. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of KGC closed at $8.52 with a market capitalization of ~$10.7 billion. The stock made a 52-week low and high of $2.72 and $10.21, respectively. The stock of the company went up by 22.94% in the past three months. It is worth mentioning that gold has been a bright spot this year and has been considered as the most attractive safe-haven asset amid coronavirus led fears. Global uncertainty along with the coronavirus pandemic, improved U.S.-China trade tensions and the civil unrest in the United States are adding to the rally of Gold. Considering the robust results for 2QFY20, resilient business, modest industry outlook and growth prospects, we have valued the stock using EV/Sales multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). Hence, we recommend a “Buy” rating on the stock at the closing price of $8.52, down 0.23% on 12 August 2020.

KGC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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